- When Two Become One: Foreign Capital and Household Credit Expansion (with Björn Richter)
Abstract: Rapid credit expansions predict lower output growth and banking crises, but does it matter who is financing them? To answer this question, we identify the ultimate counterparties financing credit expansions in a novel data set covering 33 countries. We find that foreign-financed household credit expansions predict lower future GDP growth and higher risk of crises, but domestically financed credit expansions do not. We link these patterns to depressed domestic demand driven by higher debt service payments to foreigners, reversals in foreign financing, and confirm the findings using an instrumental variable based on lending dynamics in the international banking network.
- Golden Fetters or Credit Boom Gone Bust? A Reassessment of Capital Flows in the Interwar Period
[Paper Download], [ssrn link]
Abstract: This paper uses newly digitized Balance of Payments data for 33 countries to study international capital flows and their economic implications during the interwar period. I document the boom-bust pattern in capital flows centered on the Great Depression and show that gross foreign credit is the decisive link between capital flows, reduced output growth, financial crises, and post-crisis recession severity. Crucially, this effect surpasses that of net foreign borrowing and domestic credit. The Gold Standard played a key role by exposing countries to foreign capital through global financial integration, while simultaneously restricting their ability to respond to surging inflows. Using an instrumental variable based on bilateral exposure to the US, foreign capital supply shocks are identified as an important driver of these dynamics.
- Financial Deregulation and Fertility Decisions: The Unintended Consequences of Banking Legislation
(with Julian Soriano-Harris)
Abstract: Financial deregulation has important implications beyond the realm of finance, and these effects differ by race. In this paper we use staggered difference-in-differences to link state level banking deregulation during the 1980s in the United States to two demographic outcomes: mothers' age at first childbirth and fertility rates. We find that after deregulation the average age at which women become mothers for the first time increases, and that this effect is stronger for the non-white population. The average effect on total fertility is positive over short horizons, but reverts back to zero over longer horizons. For the non-white sample, however, this reversion outweighs the previous increase, resulting in a net fertility decrease. We argue that the main channel for these effects is the boom in house prices induced by deregulation. On the one hand, this boom delays fertility by prolonging the period of saving before a home purchase, on the other, it reflects a wealth gain for home owning families, linked to increased fertility. Given the stark discrepancy in financial constraints and home ownership rates between the white and non-white population in the US, the relative strength of the channels differs, resulting in significant heterogeneity in outcomes.
- Loanly Governments: Sovereign Debt in the Wake of Credit Rating Downgrades (with Lukas Hack)
Abstract: This paper studies the funding structure of governments, examining financing beyond traditional sovereign bond markets. We document significant heterogeneity in the use of bonds and loans, and in the composition of foreign and domestic creditors. We relate this heterogeneity to sovereign credit ratings and present three key findings. First, sovereigns adjust the composition of financing instruments when credit ratings change. Second, not all rating changes and countries are alike. We find strong evidence for substitution from bonds to loans only when (i) credit ratings decrease for (ii) countries that have been rated sufficiently low. Third, the substitution toward loans is primarily financed through the domestic financial sector via foreign funds, and associated with a subsequent increase in financial distress, raising financial stability concerns. Finally, we show that the documented loan-bond substitution is also accompanied by a reduction in real GDP, primarily driven by a decline in investment, suggesting real adverse consequences.
- Capital Interrupted. International Capital and Domestic Lending around the Great Depression